The preamble to the proposed regulations state that this analysis is done on an asset-by-asset basis. This could change in the final regulations.
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Why must the “substantial improvement” test be applied on an asset-by-asset basis, rather than on an aggregate basis?
How will this impact the relocation or purchase of an operating business into an OZ?
Answers
The proposed Treasury regulations require the substantial improvement to be applied on an asset-by-asset basis. Those are the rules we have to deal with. I believe there will be taxpayer friendly rules finalized for "new use" property within a zone such that used property used elsewhere new to the zone will qualify for benefits.
The second set of regulations, so you can stipulate. Nevertheless, the IRS requested comments. The impact will be on the 70% compliance of Qualified Opportunity Zone Business Property for the business.
The asset-by-asset approach shouldn't affect relocations of an existing operating business. In fact, I doubt it affects operating businesses at all, unless those businesses also have real estate. The problematic part is large real estate projects. For instance, suppose I purchase a parcel with land and an existing building. Without touching the existing building, I construct two more buildings of equal size and value on different sections of the parcel. Even if I back out the land as per the revenue ruling on the subject, I theoretically have 2/3 good assets and 1/3 bad assets, which fails my requirement that my QOZB have at least 70% of its assets be QOZBP. The IRS has certainly received comments on this (including mine), but how they respond remains to be seen.
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